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From bond yield to macroeconomic instability: The effect of negative interest rates

Author

Listed:
  • Maria Cristina Recchioni

    (Department of Managment, Università Politecnica delle Marche, Ancona, Italy)

  • Gabriele Tedeschi

    (Department of Economics, Universitat Jaume I, Castellón, Spain)

Abstract

We present a hybrid Heston model with a local stochastic volatility to describe government bond yield dynamics. The model is analytically tractable and, therefore, can be efficiently estimated using the maximum likelihood approach. Twofold is the model contribution. First, it captures changes in the yield volatility and predict future yield values of Germany, French, Italy and Spain. The result is an early-warning indicator which anticipates phases of instability characterizing the time series investigated. Then, the model describes convergence/divergence phenomena among European government bond yields and explores the countries'reactions to a common monetary policy described through the EONIA interbank rate.

Suggested Citation

  • Maria Cristina Recchioni & Gabriele Tedeschi, 2016. "From bond yield to macroeconomic instability: The effect of negative interest rates," Working Papers 2016/06, Economics Department, Universitat Jaume I, Castellón (Spain).
    • Handle: RePEc:jau:wpaper:2016/06
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    More about this item

    Keywords

    Stochastic volatility model; Kolmogorov backward equation; maximum likelihood function; government bond yield forecasting;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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